U.S. stocks posted decent gains in the first quarter of 2014. Shares fell in January as the Federal Reserve began to taper its monthly asset purchases but rebounded strongly in February amid favorable U.S. economic data and good corporate earnings. Equities gave back some ground in March despite positive U.S. economic data, with investors keeping a wary eye on Fed policy, geopolitical tensions in Ukraine, and renewed signs of an economic slowdown in China. Mid-cap shares outperformed their larger and smaller counterparts, and value stocks outpaced growth stocks across all market capitalizations, according to various Russell indexes.
The Growth & Income Fund returned 1.35% in the quarter compared with 1.81% for the S&P 500 Index and 1.98% for the Lipper Large-Cap Core Funds Index. For the 12 months ended March 31, 2014, the fund returned 22.92% versus 21.86% for the S&P 500 Index and 21.61% for the Lipper Large-Cap Core Funds Index. The fund's average annual total returns were 22.92%, 20.16%, and 7.12% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2014. The fund's expense ratio was 0.69% as of its fiscal year ended December 31, 2012.
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Health care, utilities, energy, and materials stocks posted good gains and were the portfolio's top-performing sectors for the quarter. Consumer discretionary, industrials and business services, and consumer staples were modestly negative. We are currently focused on companies that benefit from improving trends in housing construction and rising interest rates. Meanwhile, we continue to deemphasize oil price-sensitive companies as we expect increased North American oil production to push down energy costs over time. We are keeping a close watch on indirect exposure to China as the country attempts to transition to a consumption-driven economy, but we believe that many U.S. companies can perform well within the current economic backdrop.
The U.S. economy should continue to grow modestly in 2014, supported by broadly accommodative monetary policy despite Fed tapering, improvements in the housing and labor markets, decent consumer spending, and muted inflation. Overall, we remain optimistic about the environment for equities. Economic improvements should support accelerating growth in corporate revenues and earnings, while stock valuations remain reasonable despite last year's strong performance. We could see pockets of volatility, however, perhaps sparked by geopolitical events or monetary policy uncertainty. Overall, the portfolio remains leveraged toward an ongoing economic recovery in the U.S., with a focus on stocks that should benefit from decent growth prospects.